Federal and Private Student Loan Consolidation

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Federal and Private Student Loan Consolidation

piles of money surrounding a note of student debt

Let’s talk about the 2 types of Student Loan Consolidation:

  • Federal
  • Private

These processes are often confused, but they’re very different. Here’s how:

  • Federal student loan consolidation is a logistical move you do through the Department of Education. You may need to consolidate to be eligible for some federal loan repayment programs, but federal consolidation won’t lower your interest rate or save you money.


  • Private student loan consolidation, which is also called student loan refinancing, is a financial move you do through a private lender. If you qualify based on factors including your credit score, you can save money by getting a lower interest rate.

Federal student loan consolidation essentials

When you consolidate federal loans, the government pays them off and replaces them with a direct consolidation loan. You’re generally eligible once you graduate, leave school or drop below half-time enrollment.

When you consolidate federal loans, your new fixed interest rate will be the weighted average of your previous rates, rounded up to the next ⅛ of 1%. So, for example: If the average comes to 5.15%, your new interest rate will be 5.25%.

Additionally, you’ll get a new loan term ranging from 10 to 30 years. Your repayment term will generally start within 60 days of when your consolidation loan is first disbursed and will be based on your total federal student loan balance, among other factors.

How to consolidate federal student loans

Applying for consolidation takes most borrowers less than 30 minutes, according to the Federal Student Aid website. As part of the process, you’ll need to provide details about your existing federal student loans, and choose a federal loan servicer and repayment plan for your new consolidation loan.

  1. Go to studentloans.gov and log in with your Federal Student Aid ID. You’ll find the application by clicking on “Complete a Consolidation Loan Application and Promissory Note” under the repayment and consolidation tab.
  2. Select the federal loans you want to consolidate. You can consolidate all your federal loans or just some of them. If you’re a parent with PLUS loans and you also have other federal student loans, you may want to consolidate your PLUS loans in a separate consolidation loan; consolidating them with your other federal loans will make that consolidation loan ineligible for all income-driven repayment plans except income-contingent repayment. If you have Perkins loans, think twice before consolidating them; you’ll lose access to Perkins loan cancellation if you do.
  3. Choose a student loan servicer.Federal loan servicers are private companies that manage federal loans for the Department of Education. You can choose one of four servicers for your new direct consolidation loan:FedLoan Servicing, Great Lakes Educational Loan Services Inc., Navient and Nelnet. If your loans are already with one of those servicers, you can stay or choose a new one.
  4. Pick a repayment plan for your new consolidation loan.On the standard repayment plan for direct consolidation loans, you’ll make equal monthly payments for 10 to 30 years, depending on your total federal student loan balance. Alternatively, there are six other repayment plans to choose from, including fourincome-driven plans. To find the best plan for you, check out Federal Student Aid’s repayment estimator before you begin the consolidation application. The tool shows you how much you’d pay per month on the various plans.

If you choose an income-driven plan, you’ll be asked to provide income information on the application by granting access to your IRS tax information. You can opt out, but you’ll have to submit a copy of your most recent federal tax return directly to your loan servicer after you finish the consolidation application.

  1. Complete and submit the application. The rest of the application involves filling in basic personal information and providing names of two references who have known you for at least three years.

After you review, sign and submit your application, continue making payments on your existing federal loans until your application has been processed..

There are major benefits and drawbacks of federal consolidation; it’s important to understand both because consolidation can’t be undone.

Benefits of federal student loan consolidation


Only federal loans in the Direct Loan Program qualify for Pay As You Earn, Revised Pay As You Earn, income-contingent repayment and Public Service Loan Forgiveness. If your loans are through the Federal Family Education Loan program, or FFEL, consolidating them with a direct consolidation loan will make you eligible for those programs.

Parent borrowers with PLUS loans — even those with direct PLUS loans — need to consolidate before they can be eligible for income-contingent repayment, which is the only income-driven plan parent PLUS loan borrowers are eligible for.


Consolidating a federal student loan that’s in default will restore your eligibility for federal loan benefits including deferment, forbearance and loan forgiveness programs. If you’re consolidating for the purpose of recovering from default, you have to choose an income-driven repayment plan or make three consecutive, on-time, full monthly payments before you consolidate.


Particularly if you have multiple federal loan servicers, consolidating your federal student loans can make your life easier. Instead of paying multiple federal student loan bills each month, you’ll make one payment to one servicer.

Drawbacks of federal student loan consolidation


You can end up paying interest rates. This could happen in a few ways. First, consolidating your federal loans will likely extend your repayment term. While this will lower your monthly payments, you’ll end up paying more in interest throughout the life of your loan.

Secondly, the interest rate on your consolidation loan may be slightly higher, because it will be the weighted average of your previous rates rounded up to the nearest ⅛ of 1%.

Finally, any unpaid interest on the loans you’re consolidating will be added to your principal balance. Known as capitalization, and it increases the total amount of interest you pay because you end up paying interest on top of your interest.


There’s different ways to get federal student loan forgiveness. Most federal forgiveness programs require that you first make loan payments for a certain period of time. For example, you have to make 120 full loan payments while working for the government or a nonprofit to earn forgiveness through the Public Service Loan Forgiveness program.

Qualifying payments you made before consolidating will no longer count after you consolidate. For example, if you make 20 qualifying PSLF payments and then consolidate, you’ll have to start again and make 120 qualifying PSLF payments before qualifying for forgiveness.


If you have a parent PLUS loan and other types of federal loans, consider consolidating the other federal loans and the PLUS loans separately. If you consolidate them together, your consolidation loan will be ineligible for income-based repayment, Pay As You Earn and Revised Pay As You Earn, because parent PLUS loans are ineligible for those plans.

Additionally, if you have a Perkins loan, you’ll lose access to Perkins loan cancellation if you consolidate. Consider keeping those loans separate if you plan to take advantage of that program.

Private student loan consolidation (student loan refinancing)

Private student loan consolidation, or refinancing, means replacing multiple student loans — private, federal or a combination of the two — with a single, new, private loan. You can save money most of the time, if your new loan has a lower interest rate.

Your financial history — including your credit score, income, job history and educational background — will dictate your new interest rate if you refinance. You typically need a credit score at least in the mid-600s to qualify, and rates range from around 2% to more than 9%.

It’s important to note that when you refinance federal loans into a private loan, you’ll lose protections specific to federal loans. Those include interest-free deferment on subsidized federal loans, and access to income-driven repayment plans and federal loan forgiveness programs.

If you’re ready to get started, compare refinance lenders to make sure you’re getting the lowest possible rate.


For more information on Student Loans, Loan Forgiveness, Loan Consolidations and industry tips make sure to follow our blog at: http://studentfinancialassistancecenter.com/blog/

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You can apply for loan assistance or other repayment assistance without paid assistance at no cost through the Department of Education.

Student Financial Assistance Center helps you prepare the application for student loan consolidation and repayment programs offered by the DOE.

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